A former editor for Forbes and the Financial Times, Eamonn Fingleton spent 27 years monitoring East Asian economics from a base in Tokyo. In September 1987 he issued the first of several predictions of the Tokyo banking crash and went on in "Blindside," a controversial 1995 analysis that was praised by John Kenneth Galbraith and Bill Clinton, to show that a heedless America was fast losing its formerly vaunted leadership in advanced manufacturing -- and particularly in so-called producers' goods -- to Japan.
His 1999 book "In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity" anticipated the American Internet stock crash of 2000 and offered an early warning about the abuse of new financial instruments.
In his 2008 book "In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony," he challenged the conventional view that China is converging to Western economic and political values.
His books have been translated into French, Russian, Korean, Japanese, and Chinese. They have been read into the U.S. Senate record and named among the ten best business books of the year by Business Week and Amazon.com.

The Boeing 787: The Truth Finally Hits the Fan

Take-off for a 787 -- and for the Japanese aerospace industry. (Photo credit: Wikipedia)

Congratulations to James B. Stewart on a superb New York Timesarticle yesterday on BoeingBoeing. As he has pointed out, fully 35 percent of the airframe of the 787, the troubled, if superbly advanced, new Boeing jetliner, is being made in Japan. This reflects a highly organized, subsidy-drenched effort by the Japanese industrial system to succeed the United States as the world leader in aerospace. All in all, 70 percent of the 787 is being manufactured outside the United States, up from less than 2 percent for the 747 in the late 1960s. A reasonable guess — if one that Stewart stops short of suggesting — is that Boeing is going the way of Zenith, XeroxXerox, General Motors, and other erstwhile American industrial titans that have had their clocks cleaned in East Asia.

For 99 percent of the New York Times’s readers Stewart’s report was new news but actually most of his information has been in the public domain for nearly a decade. If you doubt this, click here for “Boeing, Boeing,….Gone,” an article I wrote in 2005. My article actually went further than Stewart’s in that it pointed out that, as part of the deal, Boeing transferred its priceless wing and wingbox secrets — its crown jewels — to Japan. The deal was concluded by an already compromised and subsequently disgraced Boeing CEO Harry Stonecipher. It was approved by the George W. Bush administration.

All this does not diminish Stewart’s achievement: New York-based and a long way from the action, he has done a Pulitzer-level job in disinterring troubling facts that officials and executives on both sides of the Pacific have worked hard to bury. He has also confounded a pattern of self-censorship among Tokyo-based foreign correspondents. Although informed Tokyo-based economic observers have understood all along that Boeing’s deal with Japan was a Faustian bargain, they have also understood that it was unhelpful for their careers to say so (Tokyo has never been a free-speech zone, least of all in recent times when it has become so easy for Japan’s authoritarian bureaucrats to marginalize “troublemakers”). Tokyo-based foreign correspondents have instead promoted approved themes, notably the myth that Japan has become the basket case of the industrial world. This theme, which I debunked in an article in the New York Times Sunday Review last year, helps the Tokyo authorities fend off American pressure for the opening of Japan’s still closed markets and keeps hot money out of the yen.

Back to Boeing. It subsumes almost all the then independent companies that put Neil Armstrong on the moon in 1969. It is the last remnant of an American manufacturing base that once powered the most successful exporting nation in history. How come Boeing’s hollowing out has taken so long to reach the New York Times? Welcome to the information age. It is an age in which information moves at the speed of light — except when it doesn’t.

Eamonn Fingleton is the author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Boston: Houghton Mifflin, 1999).

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This article is spot on. As the American manufacturing base has been given away to cheaper alternatives overseas, a massive wealth drain has taken place. Wealth pools where things are made. The result has been a nation addicted to cheap imports which are empty calories for our economy, failing to provide the necessary economic nourishment to maintain our standard of living. The government counteracts this with a multi-vitamin in the form of deficit spending which replenishes our money supply, but leaves behind a mountain of debt. If our politicians had an intellect any greater than a sloth they would see this and focus on addressing the real problem America faces – a massive loss of manufacturing and intellectual property. We cannot have real prosperity as a consumer nation that simply prints money to satisfy its wants. We must make stuff.

I read a lot of opinions from people who don’t even work in the aerospace industry so, my 2-cents worth from the trenches: Actually I should say my “$2 million” worth for I am an aerospace engineer who has worked for over 20yrs designing many electronic products for various subcontractors to Boeing. To achieve the dream of the 787, what Boeing management was unaware of is that there is a culture of engineering talent in the USA which can not be exported by simply sending a specification overseas. In every firm I have worked for, the engineering teams all know from experience what type of analysis should be done, what type of worst-case tolerance studies are expected, etc, etc. I had several meetings with GS Yuasa (the battery maker) for a Li-ion battery charger for both the 787 and 737G prototype. Their lack of understanding of the type of analysis we do “here” was troubling. When I expected equations for battery parameters showing the effects of temperature, lifetime, unbalance, etc) I got instead a hand-scratched note as they smiled and bowed and correctly handed me their business cards. I felt they had no clue as to how we do reliability analysis for aerospace. Boeing should have (and had better do it from this point on!) paid attention when the engineers were notifying them of these communication problems. Boeing needs to make it a contractual obligation that the scientists and engineers from their multiple subcontractors meet with each other until the engineers are satisfied, not the bean-counters.

I respect your knowledge of the aerospace industry, and your evidence may — repeat may — suggest that Yuasa is out of its depth in making the 787 batteries. I would need to know a lot more of the circumstances to be sure. Just as you know your engineering, I know my Japan. The Japanese often pretend to be idiots as a bargaining tactic. And sometimes they send genuine idiots into meetings precisely because such people are in no danger of divulging secrets available only to their more capable colleagues. It should be noted that Douglas MacArthur thought that the Japanese intellectual level was that of a twelve-year-old boy. Virtually the only Japanese people he ever had any contact with were top bureaucrats with steel trap minds. Those of us who have studied the American occupation know that the real question is what they thought of MacArthur’s mental age. He was outnegotiated ever step of the way and never realized it.

Eamonn, There is a fundamental difference between heavy industries that manufacture and maintain capital equipment like @Boeing, and office/ home electronics companies like Xerox, Zenith and RCA. The difference is that aircraft and engines represent extremely complex, long-life capital equipment on which the owner/ operator must rely for ongoing business operations. Whereas a broken Xerox copier or Zenith television set can be easily and quickly repaired/ replaced, it’s not so with an airplane.

As a design engineer working for GE Aircraft many years ago, I vividly remember the corporate edict from Jack Welch that all GE companies were now in the services business. It was a major shock to the design engineering department. (That’s the same strategy RR is using, as described in the Economist article.) What complex equipment manufacturers have figured out is that the recurring revenue from long-term contracts for parts and service is more important than the initial product sale. (It’s more important because spare parts and service both carry enormous profits and are required on a regular basis, eliminating the peaks and valleys of the sales cycle for original equipment.)

Now the challenge for a cash-strapped airline is to decide whether short-term factors (like purchase and induction costs, ROI, etc.) or long-term factors (like maintenance costs, TCO, etc.) should drive their decision. Recognizing that it’s very expensive to switch aircraft and engines (i.e. have a mixed fleet)–in terms of manpower, maintenance, inventory and IT costs–there is no easy answer. (This was one of Michael Denis’ points.)

However, as long as Boeing and @Airbus keep innovating they can control the IP for service and parts and will continue to control the aftermarket regardless of who does the manufacturing. (This was another of Michael Denis’ points.) The only major risk I see to their dominance is if airlines refuse to play along and demand access to this maintenance IP or if independent maintenance facilities (MROs) choose to raise a block exemption regulation, similar to what you see in the automotive industry with BER (EU) and right to repair laws (US).

Whether or not Boeing should have outsourced things like wing boxes to Japan depends on how much of the IP related to innovation was also shared. Hopefully Boeing and Airbus are not mortgaging their futures to meet current investor demands.

You lose me when you write, “as long as Boeing and Airbus keep innovating…..” As far as any outsider can judge the major innovations in the 787 do not come from Boeing but rather from its Japanese contractors. I do understand the razors and razor blade analogy — the company that makes the razors enjoys ultimate control of the razor blade market but surely that means that it will be Boeing’s suppliers not Boeing that will be sitting in the catbird seat. You have to bear in mind that the airplane market has been opening up in recent years as Boeing has lost its grip. Mitsubishi will launch a regional jet, seating up to 90 passengers, later this year. We already have Embraer and Bombardier who source much of the most advanced work in their planes from Japan. There is no law that says that the Japanese have to sell their best stuff only to Boeing. Perhaps Mitsubishi will not be able to make a full size jetliner — but remember that people once said Toyota would never make a serious car.

You are dead right that the Japanese did not contribute much of the innovation in the earlier planes. And of course they have been served up much of Boeing’s earlier knowhow on a silver salver (as part of the deal with the Mitsubishi consortium). We both surely agree that the 787′s USP is its light weight, and consequent 20 percent fuel cost advantage. As the Japanese have done most if not all the serious work on weight reduction, the real innovation in this plane is coming from Japanese suppliers. What am I missing?